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Bouncing Hard Along the Bottom: Bankers' Eye View of CRE

For Most Banks, CRE Lending Still Viewed As Risky; Others See Opportunity To Take a Chance
January 26, 2011
The nation's banks, while still clearly unenthusiastic about commercial real estate, are finally acknowledging that CRE markets have hit a hard rocky bottom. A handful even says they are re-loaded and ready to resume lending.

That is largely the view expressed in fourth quarter bank earnings statements and conference calls, including the nation's nine largest banks. While their comments anecdotally substantiate that the worst of the recession for CRE has past, it's also clear that many don't see better days just around the corner.

Banks reported that commercial real estate markets displayed mixed results - still mostly negative - but that leasing markets and investment exhibited increasing signs of recovery, while nonresidential construction remained weak.

Demand for loans also was reportedly mixed with the more well funded players returning to the banking well. Overall, though, it appeared that new lending was not keeping up with loan resolutions and CRE loan amounts outstanding continued to shrink and still could for a few more quarters.

From here on out in this report, we'll let bank executives do the talking.

Still De-Risking

We clearly have to come out and say that we want the investors CRE to be no more than 100% of risk based capital or $14 billion. If you look at it, we are $15.9 billion at period end.

We are still making commercial real estate loans. The demand for that product is fairly limited, and is much better underwritten, much better priced, but it's not sufficient today to sustain the level of commercial real estate loans that we have. We will expect that to improve as the economy improves, but quite candidly, we could see our commercial real estate loans drift below that targeted level of $14 billion.
O. B. Grayson Hall, Jr., president and CEO, Regions Financial Corp.

A Bifurcated Market: Good Getting Better; Not So Good Not Getting Better

[CRE] is very much a bifurcated market and continues to be so. For stabilized assets, particularly multifamily, we're seeing intra Class A good location properties. We've seen very good activity both in note sales, as well as in terms of sale of the asset itself. And that has continued.

Cap rates have come down. Investors have adjusted their expectations. But I think the other side of the market is really getting back to the comment I made earlier on residential commercial real estate where prices are hard-to-find, and we think values have continued to go sideways to down. So what's good is getting better. What's not so good is not getting better.
Charles Hyle, chief risk officer, executive vice president, KeyCorp

Continuing But Choppy Improvement

During the quarter, we saw a continuing improvement in the commercial real estate market. For the third quarter in a row, leasing activity and vacancy trends remain strong in New York where we have our largest CRE exposure.

Traditional CRE investors continue to re-enter the market providing needed liquidity and sponsors continue to invest new equity into troubled transactions enabling us to right size many of our troubled loans.

We expect that the worst of the commercial credit cycle is behind us but we expect a few more quarters of uncertainty and choppiness in commercial charge-offs and non-performers.
Richard D. Fairbank, founder, chairman, and CEO, Capital One Financial Corp.

Multifamily, Industrial Values Coming Back

Many borrowers, of course, are still cautious in light of what they have been through over the past several years and in light of their revenue outlook. Commercial real estate and housing appear to us to have generally stabilized and are bouncing along a bottom, in some cases a rocky bottom, but in some cases better than that.

When it comes to CRE, we're starting to see some encouraging developments there, so to speak, as some investors step up and start to make some investments in commercial real estate. But I think it's still tentative, still modest, and we want to wait and see how that evolves. I think the signs are encouraging, but I think there is still tentativeness to how commercial real estate values are going to perform over the next number of months.

Some areas, like multifamily housing have been very strong but we're not in office towers, we're not in big shopping centers. So, for us, it's more in the industrial space, owner-occupied space and their values look to be at an appropriate level, but we don't see a big uptick in demand.

Clearly, the Nevada economy is really among the worst hit in the country. We are seeing some progress. You are seeing tourism has picked up. I think that you are seeing better business there in Las Vegas. Construction, however, while there is a little bit of new loan construction, is a long way from coming back and land prices and commercial real estate continue to be kind of where they were.
Russell Goldsmith, chairman and CEO, City National Corp.

Opportunities in CRE

We're also seeing opportunities in commercial real estate as we have capacity in this asset class. Pricing terms are favorable in the CRE sector as we book loans with experienced borrowers with good track records. We will continue to actively pursue new business in 2011, while maintaining credit and pricing discipline.
D. Bryan Jordan, president and CEO, First Horizon National Corp.

What we've seen is actually over the last few months, some stabilization within the income CRE. Within our core areas, we see principally stabilization in the industrial, and in the retail to a degree.

We've had opportunities in multifamily as well as hospitality within our contiguous states in Tennessee. What we see is, obviously, the states that are under duress, Florida, Nevada, Arizona, still under some stress. Our exposure is declining there fairly significantly. We did have an asset sale in Nevada this last quarter, and it's still a little messy in some of the states, but within our core area, we are seeing some stabilization and we actually see sponsors now stabilizing themselves, which is assisting as we're looking at renewals through 2011.
Greg Jardine, chief credit officer, First Horizon National

CRE Still a Credit Risk

We are reducing our commercial real estate exposure. And that has been for the last two years the single largest concern for us on the credit risk front. But we still are over concentrated. We reduced the CRE portfolio by about $260 million and we are running usually between $250 million to $300 million a quarter, but we are a billion plus in aggregate exposure beyond that which we would prefer to be at. So, as we think about credit risk, we are more - to the extent we are concerned - it's more weighted towards commercial real estate than the other portfolios.
Stephen D. Steinour, chairman, president and CEO, Huntington Bancshares Inc.

Feelin' a Little Better

In our large credit or large corporate groups, taken to include our middle market groups, credit quality has improved measurably. We continue, though, to have challenges in commercial real estate and residential real estate lending, particularly in some of the more troubled southern states, Florida, Arizona, Nevada. And the solutions to those situations will come in time. It's a bit lumpy, but I don't think I'm willing to forecast how soon that improvement is coming.

I think the United States is stabilizing at an uneven rate, although I think everybody's getting a little bit better. And I feel a little bit better about it personally, but very difficult to forecast."
William Morrison, CFO, Northern Trust

CRE Still Extremely Stressed

Commercial real estate, I just have to characterize, it's still extremely stressed. I think it will remain extremely stressed for another 12 to 18 months. There has been a little sign of life in multifamily product, medical office product. So there is some demand out there. But obviously, residential construction is not coming back anytime soon.
P. Parker - chief credit officer and executive vice president, U.S. Bancorp

Trying To Be Opportunistic, Not Foolish

In terms of commercial real estate, we're seeing opportunities out there but we're trying to be opportunistic but not foolish in terms of how we're dealing with those opportunities.

There is a little - I don't want to call it a pricing war - but there is certainly some very aggressive pricing from a couple of our competitors that are out in the market that frankly don't make sense to us and look like they're trading short-term gain for longer-term margin problems, so we're just not going to be trapped by that.
Richard B. Anderson, Jr., executive vice president, chief lending officer, Virginia Commerce Bancorp

Going Against the Flow

The other interesting thing you might look at is [that] our commercial real estate numbers actually went up and I don’t know if you’ve seen any people - or see that happening as most people are running away from it.

We have been able to find a lot of these folks and funds that are buying things at 50% of replacement cost and the like. You can lend 50% on a 50% cost, and that 50% cost is really 50% of replacement cost and you’re getting really good rates and fees on that, that’s a good business, too.

We are living up to our reputation of being salmon and swimming upstream, in some respects, are going against the flow as we like that business… We are seeing good growth on the real estate side as people take advantage of their ability to take advantage of the dislocations in the market.
Edward J. Wehmer, president and CEO, Wintrust Financial Corp.

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